EUR Confronts Challenging Outlook - TD Securities

By FXstreet.com | Updated August 01, 2014 AAA

FXStreet (Łódź) - Martin Schwerdtfeger, FX Strategist at TD Securities, suggests that along with the improvement in US GDP growth and the Fed's asset purchase program coming to an end, the EUR should start heading lower.

Key quotes

"As the Fed tapering process nears its end and the FOMC adapts its message to set the stage for rates lift-off, policy divergence between the ECB and both the Fed and the BoE should lead to more volatility and eventually to a weaker EUR."

"Both survey and hard data have cast shadows over second-quarter economic growth in the common currency area, and the ECB's TLTROs will lack the teeth to speed up the recovery through the remainder of this year."

"Higher US yields will eventually push German bund yields –hence peripheral rates –higher. But the currently soft Eurozone economic data, low inflation and slow transmission of monetary stimulus will create a temporary buffer, which will see EUR weaken further."

"With peripheral sovereign bonds showing rich valuations (e.g., the yield of Spanish 10-year bonds was briefly lower than equivalent USTs this week) and European stocks still at very high levels despite the recent, modest correction, the hurdle is currently very high for Eurozone assets to entice stronger foreign capital inflows."

"As economic momentum picks up in the US, the nominal growth differentials should lead to underperformance of Eurozone assets. This will keep the EUR in defensive mode."

"We see EURUSD at 1.29 by year's end. Short-term, persistency around 1.3375/85 keeps the 1.30/1.32 range within reach in the next few weeks."

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